Terra Infirma

The Fed’s goal on Tuesday was not to rattle the markets, but I can’t help but get the feeling of Terra Infirma.

Here’s what’s shaping our markets:

Exports are declining – widening our trade gap to $49.9 billion in June. Exports dropped 1.3%, while imports rose 3%. The $7.9 billion gap is the highest since record keeping began in 1992. It was 18.5% more than median forecasts of $42.1 billion.

Economists are now downgrading their forecasts for GDP… they are now expecting that in the second half of the year that Gross Domestic Product will expand at an annual rate of 2.55%, down for previous estimates of 2.8%.
Household Purchase also got downgraded to a 2.25% growth rate, compared with the prior 2.6% estimate.

A month ago analysts had predicted that consumer spending would grow by 2.4% - today, they’re forecasting it will only grow by 1.5%. This data is bolstered by consumer purchases, which, for the first time since the beginning of WWII, dropped 1.2% last year after rising 3% on average over the past 30 years, according to Bloomberg.

Payrolls, which drive consumer spending, have done a u-turn to an average of 51,000 over the past 3 months, after a couple hundred thousands of jobs were added on average in March and April. Unemployment is expected to remain above 9% through next year.

So what does all this mean?

Well for starters the global economy is cooling and this is bad news for domestic companies relying on export revenues. Foreign consumers aren’t demanding U.S goods at a pace that was anticipated – and this means that inventories will grow, creating a shift in supply/demand. This could lead to further jobs losses as companies will be forced to deal with lower revenues and might have to offset losses by trimming their workforces.

It will then have a ripple effect on consumer markets, as hard-working Americans will be forced to cut back on spending, as their salaries will remain below average and those looking for work will continue to find it hard to get back on payrolls.

“Unemployment is high, income growth has been pretty slow,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co told Bloomberg. “Household wealth is a lot lower than it was three years ago.”

From here things can get scary given the penchant for government intervention in our recovery, as seen by the Fed’s most recent language.